Section 2 -Major Issues Raised By The Study
The project brief supplied by MAF required that the study provide information on the process for, costs of, and potential improvements to the making and operation of Levy Orders under the Commodity Levies Act (1990). The study raised a number of general policy issues associated with the Act, in addition to those dealing specifically with making and operating orders. These are dealt with in Section 2.1, while Sections 2.2 and 2.3 provide information on issues relating to the making and operation of Levy Orders respectively. Where problems or difficulties have been identified, potential improvements or solutions are discussed.
2.1 General Policy Issues Related To The Commodity Levies Act 1990
2.1.1 Rationale behind the Commodity Levies Act 1990
In defining the circumstances under which the Minister will permit industry organisations to make a commodity Levy Order, the Act (Section 5 (2) (m)) states that the Minister will approve the levy only if "... it would be impossible or impracticable to finance the doing out of voluntary levies of the things for which the levy is to be spent; or ... if the doing the things for which the levy is to be spent were paid for out of voluntary levies, persons who choose not to pay would derive unearned benefits from the doing of those things...". In other words, the levy is permitted where it can be shown that market failure is likely to prevent the collective activities, which the levy is to fund, from occurring. The market failure argument on which Levy Orders are justified, and which is also the rationale for similar policies throughout Europe, North America and Australia, is that the results of investment in activities such as research and generic promotion are very difficult for investors to internalise. That it prevents "free-riders" (at least among growers) was seen as the most important of the good features of the commodity levy by industry organisations and growers alike.
It was also felt that it would be quite impossible to finance the activities which are presently funded by commodity levies by means of voluntary levies. Several organisations which had had voluntary levies in place before making the commodity Levy Order, reported that growers who do pay voluntary levies resent subsidising those who do not. Consequently, payment levels decline over time.
2.1.2 The role of Government in the making and operation of Levy Orders
Government, through the relevant ministries, is responsible for assessing and granting Levy Order applications. The Act defines the types of expenditure which may be undertaken with levy moneys.
Once the Levy Order has been made, however, Government's role is restricted to receiving annual reports on levy expenditure (which are not usually very actively pursued) and evaluating and acting on requests for compliance audits.
By international standards, this represents a relatively low level of state intervention in the activities of industries, particularly since the Government is, through the Act, conferring on industry organisations the "right to tax" their members. There are few instances, outside the primary sector where such a right is given to any organisation. However, many of the growers who attended focus groups, as well as some of the industry organisation representatives interviewed, considered that Government's role should be limited entirely to ensuring that appropriate consultation has been entered into, that the ballot is fair and that annual reports are furnished. Determining the purposes of levy expenditure and the conduct of compliance audits was frequently regarded as being more appropriately left to industry. The requirement to return to levy payers every five years for a new mandate, which is also unusual by international standards, is seen as a stringent review provision which removes the need for any Government involvement, other than ensuring that the review is conducted in accordance with the provisions of the Act.
2.1.3 The scope of an industry
The Commodity Levies Act permits only the levying of those who produce "commodities". Processors and others further up the marketing chain cannot be levied, even where they clearly benefit from the results of levy-funded activities. Some of those interviewed as part of the study reflected that while the Act prevents "free-riding" by growers on activities funded by others, it does not prevent other sectors of the industry from doing so. Consequently, the Act may be constraining, rather than facilitating, vertical integration within industries at least to some extent.
The process of re-applying for Levy Orders every five years should provide the opportunity for industries to reconsider institutional arrangements and product divisions. For example, changes may be required in the light of the changing market environment or in order to reduce the costs of Levy Order application and other aspects of administration. Umbrella structures covering a number of commodities for which there are common issues, may be formed, in order to minimise costs and duplication of effort. It would be necessary to set up such organisations in such a way that the focus on individual commodities was not lost. New groupings, which have different needs in terms of research and promotion etc, may be identified within broad commodity categories. Groups of producers (eg regional or ethnic or those who operate non-conventional production systems such as organic producers) may consider that they have separate communities of interest from a broader group of which they have previously been part. It may be appropriate for such groups to implement separate levies within or outside an umbrella structure. To the extent that the nature of levies and organisations are reviewed at initial or subsequent applications for Levy Orders, the Commodity Levies Act will facilitate industry development and revitalise industry organisations.
However, rather than reconsidering these issues at five yearly intervals, it may be that the high costs of consultation, ballot paper design etc, encourage industry organisations, particularly smaller ones, to change as little as possible at each re-application in order to minimise costs. To the extent which this occurs, the commodity levy may actually stifle industry development. For example, one industry group proceeded with a proposed basis for imposing a levy, although it became obvious during the period of application that the basis was inappropriate, because to change at that stage would have resulted in significant cost.
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2.1.4 Duration of a commodity Levy Order
Industry organisations must return to their members to seek a mandate for continuation of the commodity levy after five years and the new Levy Order must be in place within six years of the previous one. This process is intended to ensure that those operating commodity levies remain accountable to levy payers and that levies do not continue to exist when they are no longer required. This is not typical of such levy provisions throughout the world as only the United States has a statutory requirement for repeat referenda. Even there, they are usually held less frequently than every five years. Regular reviews, conducted by Government or by, or on behalf of, the industry organisation, are required in many other countries but a referendum would generally be required only if the review process uncovered significant dissent. Although there are some concerns about the cost that the five-yearly reapplication imposes, particularly on small industries, the majority of industry organisations and growers included in the study considered that five years is an appropriate interval to ensure that industry organisations remain accountable to their levy payers.
2.1.5 Uses of funds collected as commodity levies
The permitted uses of levy monies are defined by the Act and are sufficiently broad to include almost any activities which can be shown to benefit levy payers as a whole, except for trading or commercial activities which are specifically excluded. Industries may further constrain the uses of levies by redefining them within the relevant Levy Order.
However, the legislation does provide the opportunity for industry organisations to use levy funds for purposes precluded by the Act with written approval from the Minister. No instances where this had occurred were identified by the study, although the division between "commercial" and "non-commercial" activities is often blurred in areas such as promotion. The Act was amended in 1995 to permit the imposition of a levy on wheat for the purposes of crop insurance, a commercial activity. The issue of whether levies should be permitted only to fund activities to which market failure arguments may be applied, or whether industry itself should be permitted to determine the uses of levy funds is of considerable interest, but outside the scope of this study.
2.1.6 Costs and benefits of commodity levies
Section 10( 5)( a) of the Act states that a commodity levy may be implemented only if "the spending of money for the purpose concerned will benefit most of the persons primarily responsible for the payment of the levy concerned". However, ex-ante cost benefit studies have not been required of industry organisations during the initial application. Nor have any ex-post studies been carried out to date on levies which have been in place for several years. Imposition of a review process which includes cost benefit analysis, as the United States has recently done, would impose large costs on industry organisations, particularly those representing small industries. The five yearly process of reapplying for Levy Orders may be viewed as the ultimate assessment of whether the levy is benefiting levy payers.
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Senior Policy Analyst
Sector Performance Policy
MAF Policy
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